I’m coining a new phrase, Xinja’s Pivot, to describe “bad-to-worse” changes in business direction. Mark my words, three years from now it’ll be a hall-of-famer alongside Occam’s Razor and Maslow’s Hammer.
The thing about neobanks is that if you take the fees out of banking, you take most of the profits out too. What’s left is a sub-scale company with reverse operating leverage that has to pay more for funding, charge less on loans, and pay through the nose for customer acquisition (because there is no brand). By contrast, Commonwealth Bank of Australia can borrow money almost as cheaply as the Australian sovereign. There is a reason the Big 4 are the dominant providers in the space, and it’s the same reason Bendigo Bank still hasn’t made it the Big 5 (we are ignoring MacBank for now, mostly out of spite). If you’re a neobank, you’re pushing a gigantic ball of shit up a fucking long hill just to get a toehold in the space – not even to succeed, just to earn the right to exist.
The result is unprofitable neobanks (re-)inventing
the square wheel old ways of making money, like charging account fees. Some new financial providers have gone one step further and are un-inventing solved problems. Beam customers can’t withdraw their money, and Robinhood hackers accessed customer accounts.
Xinja is a case in point. The neobank gave up on banking today and is returning its banking license and giving deposits back to customers. The company blamed COVID, due to:
“an increasingly difficult capital raising environment affecting who is willing to invest in a new bank”
I call bullshit. The business model was unsustainable, and it failed. I’m not without sympathy; Xinja didn’t have the resources it needed to succeed. I wouldn’t attempt to build a bank with less than a billion dollars (plus additional funding for loans). Banking is hard work.
What’s really igniting my “old man yells at cloud” instinct is Xinja’s decision to pivot to focus on its US stock-trading platform, Dabble. The grand, cosmic irony of shifting from a business model where there is no profit (neobanking) to a model where there is literally no fucking revenue (stock trading apps) is off the charts. I rolled my eyeballs so hard they fell out of my head and dropped onto the floor. (I put my computer monitor in between my feet so I could type this post).
From a business perspective, I get it. The core model failed, you want to salvage what’s left, so, you pivot to something else that’s working. Stock trading is booming – Interactive Broker (IBKR)’s volumes in November were up 175% year on year on a 3% increase in client accounts. Xinja could even do ok from here if it gets acquired. But seriously, stockbroking is not a good industry to be entering right now. It might be easier than banking, but that’s not saying much.
There is an influx of capital and a fuckload* of new start-ups in the brokerage space. Most of them are weak and will fail. Some will be acquired by stodgy old brokers trying to reinvent themselves. If you’ll permit me a pivot of my own, these thoughts lead directly to my IBKR thesis which I’ve summarised below.
* fuckload = more than a lot but less than a plethora
- The old monetisation model for broking is outdated (fees are trending towards zero) and interest rates are zero (eliminating the other main source of revenue)
- As a result, brokers will increasingly focus on value-added services like portfolio monitoring and stock picking tools, data and research
- Brokers will become more like financial product suites, not just a place to trade & hold stocks
- IBKR has solved all of the brokerage problems and is moving further into monitoring and research
- IBKR is the best-run broker out there and has enough capital. It is going to wipe the floor with most of these new entrants. Over time, I expect the industry will consolidate.
Problems IBKR needs to overcome:
- It’s not clear yet if one large global platform can win against local providers, because regulation and customer needs vary from market to market. Most financial businesses find it hard to expand beyond their home markets for this reason.
- The customer onboarding process is bad. In addition to filling out many pages of forms, I had to send a letter (an actual letter) to the local IB office in Sydney to verify my identity and open my account. It’s not clear yet if IBKR can actually grow its customer accounts enough to take market share.
- The IB platform is pretty hard to use. The overall UI/UX experience is still suboptimal, but IB has visibly spent millions of dollars improving it since I became a customer last September.
So. Xinja’s jumping out of the frying pan into the fire, and IBKR is well worth a look on the assumption that the industry will bundle up and consolidate over the next five years.
Food for thought.
I own shares in Interactive Brokers. In my superannuation fund, I may have positions in Australian banks that I am not aware of. This is a disclosure and not a recommendation.